Biomass panel to address off-take agreements, hedging

By Bryan Sims | November 24, 2010

Uncertainty and exposure to risk associated with complex supply chain dynamics and tight debt markets have left once promising biomass-to-bioenergy deals to falter. At the Pacific West Biomass Conference & Trade Show Jan. 10-12 in Seattle, in a panel titled, Minimizing Your Exposure to Risk with Effective Hedging and Contract Strategies, industry experts will explain how introducing structured price indices before engaging long-term power purchase agreements can be a critical hedgingtool to encourage healthy investment for project development.

Peter Gardett, bureau chief with Argus Media Inc., intends to discuss how implementing a clear, transparent, inclusive pricing of fuel is essential for developing the Pacific Northwest biomass market, not only for bioenergy producers in the region, but also for those in accessible Pacific Rim markets.

“The purpose is to introduce a pricing mechanism to encourage utilities to take woody biomass, hedge their exposure to those fuels and sign contracts that support long-term production investment,” Gardett said. “I think the biomass industry has to be more comfortable with indexation and the operating environment in which they work.”

Gardett noted the disparity between how the Pacific Northwest has struggled to keep pace with a rapidly developing market in the Southeast. “There’s no reason the Northwest should be lagging,” Gardett said. “Having a more transparent market should help close that gap.”

Pete Stewart, president and chief executive officer for Forest2Market, will outline a strategy for negotiating long-term supply agreements that involve both relationship building between suppliers and bioenergy producers, and how a pricing index would ensure that suppliers are being paid based on fair market value. Once a fair market value price index is in place, according to Stewart, biomass suppliers should be more willing to accept long-term agreements.

Since Forest2Market currently has biomass indexation models “in practice” throughout the country, Stewart said the firm is capable of breaking down various transactions into different components such as harvesting, chipping, hauling and the actual product itself. He added that the majority of the biomass fuel cost consists of capital, labor and diesel fuel used to transport and produce the fuel, with a fraction of the price (about 10 percent) coming directly from the wood fuel itself.

“So, what you can do is if you’re a buyer or supplier of this material, what you’re always long on is CPI (capital price index) or inflation and diesel [cost],” Stewart said. “In other words, you always have exposure to those two things. You can easily quantify what those are, and if you can quantify what those are, you can hedge those in a futures market.”

Stewart added, “Once we can demonstrate that through really good data and analytics, then bankers, developers and suppliers can get really comfortable around that index and use that to develop a dual index strategy.”

JD Lindeberg, principal and chief financial officer for Resource Recycling Systems Inc., will discuss how the negotiation of a power purchase agreement “pass through” could be a viable hedging strategy for bioenergy developers when unpredictable price fluctuations of external components within the PPA, such as diesel prices, affect price structure of renewable electricity or power sold into market.

“Effectively, the idea is you do this in such a way that enables you to separate out the execution risks in the marketplace with the input risks,” Lindeberg said, adding that understanding this prior to signing a potential PPA is key for biomass project developers. “In general, if the price of diesel fuel runs up because a shortage of petroleum products, we’re probably going to see a similar increase in the price of power and the availability of that power.”

Katherine Ryzhaya, vice president of structured transactions and renewable energy markets for Evolution Markets, will round out the panel.

To register for the Pacific West Biomass Conference & Trade Show, or for more information, click here.

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